Developing Brazil: Overcoming the Failure of the Washington Consensus (review)

This book by Luiz Carlos Bresser-Pereira, a highly respected Brazilian academic, former business executive and Minister of Finance, is a severe critique of the neo-liberal policies which were recommended and partially imposed by the "Washington Consensus" (which was formulated by the policymakers from the leading industrial countries and the International Monetary Fund) and carried out in a docile manner by many Latin American governments, including Brazil.

In essence, Bresser-Pereira's theme in this book is that the policies which followed the successful elimination of inflation have not contributed to growth – i.e. the elimination of trade barriers, the opening of the capital account of the balance of payments, the high interest rates to lure in capital – have resulted in the economy growing at slow rates. In addition, the fiscal goal of Brazil's government "… was not … a reduced budget deficit, but an increased primary surplus, which could be achieved in combination with a large budget deficit as long as the total interest rates paid by the state remained high" (35). High interest rates were necessary to attract foreign savings, which increased the cost of debt servicing and resulted in an appreciation of the exchange rate. The appreciated exchange rate weakened the competitiveness of the industrial sector – making it difficult to export and subjecting domestic industries to severe import competition.

These are the themes that are outlined at the beginning of the book and appear in greater details in subsequent chapters. Bresser-Pereira challenges the general belief that Brazil's income distribution improved since the introduction of the REAL stabilization plan. The much discussed improvement in the Gini coefficient pertains mainly to labor income, which accounts for only 40 percent of the national income, while the share of rentier's income rose from 2 percent of the GDP in the early 1990s to 8.3% in 2005, and thus "It is the members of the richest group that benefit from high interest rates" (56).

Provocative statements which should stimulate many to rethink their view of the world are sprinkled through the whole volume. For instance, Bresser-Pereira states that "… There is no economic and social development without cultural and political development. Economic development takes place when income per inhabitant increases with productivity and the population's wellbeing improves; social development occurs when income distribution among classes and races becomes more equitable; cultural development occurs when the education level rises and the nation frees itself from ideological dependency on wealthier and more powerful nations; political development occurs when the citizens' freedom increases" (68–69).

There is a whole chapter dealing with "the Dutch Disease" which is the result of "growth-with-foreign-savings" and consists of an over-appreciation of the exchange rate. The disease "originated in the production and export of commodities using a cheap and abundant resource that maintains the country's exchange rate at a level consistent with the profitability of the respective industry, but below the level that makes other tradable industries… viable" (36). This disease is a market failure because the sector which produces natural resource intensive goods causes a negative externality on the economy's other sectors.

Bresser-Pereira is also a severe critic of the currently popular "inflation targeting" policies of many central banks, including that of Brazil. He states that the argument that central banks should have one target because monetary authorities have only one policy instrument "… is neither reasonable nor realistic" (116). Considerations of employment and the exchange rate should, and in some cases do, serve as informal objectives. In the case of Brazil, Bresser-Pereira feels that "By doing no more than managing an inflation targeting policy since 1999, the government shows that it lacks a clear strategy to reduce the interest rate and neutralize the tendency to the over-appreciation of the exchange rate – the two main monetary problems that the Brazilian economy faces." (116–117)

This review can only give a sample of the many critical insights Bresser-Pereira has on...